Gold bugs need help from Fed

Scrooge McDuck and other gold fans may want to hold off on diving into the metal until the Fed announces more stimulus.

Gold has enjoyed a mini-rally in the past few weeks even as other commodities have plunged on continued concerns about the health of the global economy.

Through Tuesday's close, gold was up 2% since mid-May. Meanwhile, prices of the far more useful copper were down 3%. Corn futures are down 4%. Other demand-sensitive commodities like oil and wheat have each fallen nearly 10%. And coffee is in decaf mode. Prices have tumbled more than 15%.

But hopes for a sustained rally in the yellow metal pretty much begin and end with the Federal Reserve. Gold is viewed as a classic inflation hedge and any further stimulus from the Fed during the next few months would likely be viewed as bad for the dollar and good for gold.

Investors are clearly betting that the crisis in Europe, slowdown in China and continued sluggishness in the U.S. (Is that some dry rub I see on the job market? Yes kids, we're still in a low and slow BBQ recovery!) will eventually lead the Fed to do a lot more to lift the financial markets (and perhaps even the economy) out of its funk.

But the market didn't get what it wanted Wednesday. The Fed simply decided to extend its Operation Twist program (swapping short-term bonds for longer-term debt) instead of announcing a third round of quantitative easing, or QE3. Gold was trading about 1% lower prior to the Fed announcement and continued to drop in mid-afternoon trading.

Gold bugs obviously want (and need) the Fed to be more aggressive. Still, it's not clear just how high gold could really go in the coming months even if the Fed eventually changes its tune on the need for QE3. While more Fed accommodation should, in theory, be a plus for gold, the reasons that the Fed needs to consider more bond purchases in the first place is not positive for gold.

Sure, gold does tend to rise and fall in line with inflation expectations. But you can't completely remove the Economics 101 law of supply and demand from the investing equation. As I pointed out in a column last month, the awful conditions in Europe may lead to a prolonged period of "Au"-sterity for the metal, especially if the PIIGS pain is followed by reduced purchases of gold from Europe's biggest trading partner China and, to a lesser extent, India.

Given all the chatter about central banks around the world potentially easing en masse, it's a bit surprising that gold hasn't rallied even harder than it has in the past month. In fact, the SPDR Gold Shares Trust ETF (GLD) has lagged the S&P 500 (SPX) during the past month.

Richard Ross, global technical strategist with Auerbach Grayson in New York, points out that gold actually has been a disappointing investment if you back out its nearly 4% jump on June 1 -- the day when a woeful U.S. jobs report kicked QE3 talk into high gear.

The lack of a bigger jump in gold is also unusual when you look at what the dollar has done lately.

The greenback has weakened against the euro in recent weeks as the favorable (for now) outcome to the elections in Greece and hopes that European leaders will eventually step in with a formal plan to save Spain and Italy (unveiled at next week's ubiquitous EU summit perhaps?) have boosted the odds of the euro currency surviving in its current form.

Ashraf Laidi, chief global strategist with City Index Ltd. in London, wrote in a report Wednesday that gold may now be "out of touch" with the euro. With so many investors flocking into U.S. debt simply because they are not Southern European bonds, yields have plummeted to ridiculously low levels. If the safe haven trade is finally unwinding, 10-year Treasury yields may have nowhere to go but up -- even if the euro gains more ground versus the dollar.

So much for a weaker dollar being good news for gold.

"Gold has not been able to build on its gains and that is somewhat curious," Ross said. But he added that all it may take for gold to break through technical levels of $1630 an ounce and start climbing even higher is for more hints from Bernanke about additional stimulus.

Unless the U.S. economy roars to life in the coming months, there's still a good chance that those hints will come. Keep in mind that the Bernanke playbook for the past few years has been to sit patiently during the summer to see if the economy still needs a jolt following the typical May-July slump. The answer was yes in 2010 and last year. It may be yes again this year.

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With that in mind, Bernanke likely will tip his hand about what the Fed plans to do next at its annual confab in Jackson Hole, Wyoming in August. That's where Bernanke introduced the notion of QE2 in August 2010 and it's where he teased the idea of Operation Twist last year.

Marshall Berol, co-manager of the Encompass Fund (ENCPX) in San Francisco, considers himself a gold bull and he expects that an eventual Fed move will be a catalyst to lift gold to new highs near $2000 an ounce.

"Gold has come down enough from its highs that it should find a base and resume its upward move," he said.

But Berol, who prefers to invest in mining companies as opposed to actual metals, said that firms like Freeport-McMoRan Copper & Gold (FCX), which he owns in the fund, may be better bets than the metal. That approach may make more sense than trying to invest in gold itself.

Mining companies have actually outperformed gold lately. The Market Vectors Gold Miners ETF (GDX), which owns big stakes in industry leaders like Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM) and AngloGold Ashanti (AU), is up more than 10% in the past month. And those four stocks, as well as Freeport-McMoRan, all pay dividends to boot.

Frank Holmes, chief investment officer of U.S. Global Investors in San Antonio and the author of the book "The Goldwatcher," also likes gold miners that pay dividends. His firm owns shares of Franco-Nevada (FNV), Yamana Gold (AUY) and Randgold (GOLD) and he said the lack of QE3 for now does not mean gold's run is over.

"The fear trade for gold is that the government is devaluing the dollar. That has not gone away," he said.

So if you think gold may soon be heading higher, you may want to consider miners instead. Time to channel my inner Warren Buffett here. Good luck trying to get quarterly dividend payments from a cube of bullion.

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.